22. Comparative Advantage (#2 of 2)

VOICE NARRATOR: Even when one side is less efficient, there are still gains to specialization and trade. Why?

Let's look at our work efforts: We apply the same total energy, but you get 30 coconuts while I get 20, or you catch 40 fish while I catch 10.

Look at our efforts for one of each: You use less energy; you are more efficient; you have the absolute advantages.

If we each had an absolute advantage, then of course we would know where to specialize.

But what about this case? Why do we gain from specialization and trade?

It's because our opportunity costs are different.

For 1 coconut, your opportunity cost is 4/3rds fish, but mine is half a fish. I have the comparative advantage in coconuts.

You must have the opposite comparative advantage, in fish. And indeed, one fish costs you 3/4s of a coconut, but costs me 2 whole coconuts.

So let's start from any pattern of work: I get one more coconut; we lose half a fish. You catch one more fish, we lose 3/4s of a coconut. We gain a margin of a quarter-coconut + half a fish.

If our opportunity costs are different, then the slopes of these lines are different, and there are gains from specialization and trade.

Category:

Education

Tags:

• Comparative
• advantage
• specialization
• trade
• economics
• ecolanguage
• opportunity
• cost
• absolute